In this paper we investigate the necessary ingredients for an accurate model of belief formation. Using experimental data from a previous experiment, we bring in a new group of subjects whose job it is to predict the action choices of the subjects from the previous experiment. While the rules we consider are all, strictly speaking, adaptive (being based on past observables), some of the variables we uncover represent fairly sophisticated behaviour. Going from less to more sophisticated, we find that the following are important components of the belief formation process: the history of play, payoffs (whether real or ``imagined" in the sense of Camerer and Ho (1999)) of the player whose actions our subjects are predicting and the payoffs of the other player. The paper also documents the presence of subject-specific heterogeneity in both initial beliefs and, to varying degrees, almost all of the variables found to influence beliefs.
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Paper provided by Southern Methodist University, Department of Economics in its series Departmental Working Papers with number
0802.
Find related papers by JEL classification: C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
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